In recent weeks negative gearing has become a political football as both sides of the political arena attempt to leverage their campaigns with arguments both for and against this investment strategy.
Negatively geared investments have been a popular vehicle for many Australians to grow their wealth over the years. A basic principle of the Australian tax system is that expenses related to the earning of income are deductible, including the interest on any borrowings to purchase an investment asset. A negatively geared asset results when these costs exceed the earnings from the investment, the resulting loss reduces a person’s taxable income and less tax overall is paid. Whilst it is often used for properties it can also be used for other investments such as shares or bonds.
The Labour Party has indicated that if voted into office wants to make housing more affordable, particularly for first home buyers by reigning in negative gearing tax concessions. Specifically labour would restrict negative gearing to new properties as well as limit the deductions that can be claimed.
On the other side of politics the coalition is saying that if this was to happen property values will plummet (less buyers in the market) and rents will rise (fewer properties to rent). The coalition has not indicated that they will change the current negative gearing rules.
Interestingly, the Hawke/Keating government in 1985 abolished negative gearing and in 1987 reintroduced it. During this time there was a rise in rents, particularly in Sydney and Perth, however in other major cities rents remained flat. It has been argued that the rise in rents in Sydney in Perth was due to other factors than abolishing negative gearing.
A negative gearing strategy can definitely help you grow your wealth by allowing you to invest in more assets and increase your investment base. This naturally amplifies an investors potential gains as more funds are invested. A caution though, whilst negative gearing can certainly magnify gains it can also magnify losses. If the asset you invest in goes down in value the interest on the loan still needs to be paid and you are stuck with an investment worth less than you paid for it, and often less than the loan you took out to purchase the asset. To be an effective strategy the investment must be increasing in value otherwise you are simply losing money.
Regardless of the outcome of the federal election I still believe negative gearing will remain an important strategy available to investors to grow their wealth.